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Thursday, October 9, 2008

Tesco's Fresh & Easy Has Put 16 of its 93 Stores in Formerly Vacant Supermarket Buildings and Plans to Do More Coversions While the Deals Are Hot

Pictured above: The Fresh & Easy store at Eagle Rock & El Paso in Los Angeles' Glassel Park. It's one of the 16 Tesco Fresh & Easy markets located in former supermarkets. It's also one of the first Fresh & Easy stores opened in Southern California by Tesco.

Tesco's Fresh & Easy Neighborhood Market said today it plans to continue it's original retail store location strategy, in conjunction with its second strategy of building new stores from scratch, which is to put its convenience-oriented, small-format (10,000 -to-13,000 square foot) combination grocery and fresh foods stores into vacant retail buildings such as supermarkets and drug stores which it guts and remodels, turning the locations into Fresh & Easy food and grocery markets.

The grocery chain's second retail store strategy is its built from scratch Fresh & Easy stores. These new stores are built from the ground up using the Fresh & Easy store design prototype. Fresh & Easy also will continue this strategy and practice, along with putting its grocery markets into vacant buildings which previously contained supermarkets, drug stores and other retail format stores.

All of the first batch of Fresh & Easy stores opened from late October, 2007 -to- early 2008 were units put into the converted retail stores, including former supermarkets, drug stores and a couple other formats. This was the primary reason the grocery chain could open so many stores in such a fast amount of time intially. The company is now building many more brand new stores from scratch in conjunction with using the remodeling and conversion strategy and practice.

In its announcement today, Tesco's Fresh & Easy specifically focused on the practice of putting its stores in vacant retail box buildings which formerly contained supermarkets.

The grocer has located many of its current stores in Southern California and Arizona in buildings that once contained Albertsons, Ralphs and other supermarkets, for example. None of the current 22 Las Vegas region Fresh & Easy markets are housed in former supermarkets. However, the majority of those stores are located in former drug store or other retail format stores, including many that formerly were Rite Aid Drug stores.

Tesco's Fresh & Easy today released a list of 16 of its Fresh & Easy markets which to date have been located inside what once were former supermarkets that had been closed by their respective owners and were vacant until the grocery chain acquired the leases on the store buildings and converted them into Fresh & Easy stores.

Twelve of the 16 stores are in Southern California and four are in the Phoenix, Arizona Metropolitan market.

In terms of acquiring the leases and converting these formerly vacant and non-tax producing locations, Fresh & Easy has become a one-company commercial retail real estate reclamation service for the owners of these buildings since many of them have been vacant for a number of years.

Acquiring and turning the non-tax producing empty buildings into operating food stores also is a benefit for the respective cities and counties in Southern California and Arizona.

Additionally, each Fresh & Easy store employees about 22 people, according to a Fresh & Easy spokesperson. That means in addition to rehabilitating the vacant buildings and turning them into productive resources, Tesco's Fresh & Easy Neighborhood Market also has created about 352 new jobs by opening these 16 stores that once were operating supermarkets but prior to Tesco's arrival in Southern California where its Fresh & Easy chain is headquartered were vacant, unproductive retail boxes.

An added benefit to Tesco's acquiring the store leases and opening and operating the stores is the its a United Kingdom-based company and thus each dollar (or pound) it invests in the U.S. through Fresh & Easy is foreign investment in the nation -- and by an important trading partner country as well -- which the U.S. needs in industries like food retailing where few overseas companies tread in the U.S. In addition, with the current financial crisis in the U.S., the country needs all the foreign investment and capital it can obtain from its international friends, within reason of course.

The jury is still out in terms of how the Fresh & Easy stores located in these former supermarkets and the other onetime vacant retail box stores will perform, as we've written about before in Fresh & Easy Buzz.

After all, many of these supermarkets were closed and thus rendered vacant by grocery retailers like Albertsons, Ralphs and others because the stores were underperformers in their respective locations.

But the Fresh & Easy stores are different in size, scope and format -- although similar in that they too sell food and grocery products -- than the supermarkets that were formally housed in these 16 buildings.

So that fact -- along with Tesco's willingness to use its deep pockets to promote and subsidize the Fresh & Easy stores because it considers the venture a long term one rather than a market test -- could enable many of the stores located in these former supermarket locations to ultimately perform well compared to how the stores might perform should a retailer with less resources and less-deep pockets than Tesco have opened them. Although resources are only one-part of the successful food retailing equation.

Tesco's strategy with Fresh & Easy is what we call "critical mass," which is to open as many stores (within plan) as fast as possible in order to create synergies and achieve certain target sales numbers. As of today Tesco has 93 Fresh & Easy stores. Its opened all those stores in just a little over 11 months. The first Fresh & Easy store opened in late October, 2007 in Hemet, which is in the Southern California desert region.

It's our analysis, as we written about previously, that at some point -- like when it hits a 250 -to-300 store count -- Tesco will then have to seriously analyze and evaluate the performance of its stores. At this point we think it will find a number of underperformers. We believe those underperformers will in the majority be those located in the previously vacant supermarkets, drug stores and other retail box buildings rather than those built from scratch Fresh & Easy stores. As an example, we have it from reliable sources that Fresh & Easy store number one in Hemet, California, which has been open almost one year, isn't yet doing $100,000 in average sales per week.

We don't think this serious store-by-store evaluation process will happen until 2010 though. And the strategic thinking -- and hope -- within Tesco is that by then all or nearly all of the Fresh & Easy stores opened in say the first year will be performing well enough not to have to close any of the units.

Tesco Fresh & Easy Neighborhood Market CEO Tim Mason, who is the former corporate marketing chief for Tesco PLC in the United Kingdom and has a particular personal affinity for the Fresh & Easy brand and the Fresh & Easy clock logo pictured at the top of this piece, took a little time today to tout the retailer's process of turning vacant supermarkets into productive grocery stores. He has reason to boast a bit. It's probable in our estimation the majority of these 16 supermarkets would probably still be empty had not Tesco acquired them for its Fresh & Easy stores.

"Grocery stores are very important to neighborhoods and when supermarkets close, neighbors are many times left with few food options," Mr. Mason said today in a statement. "At Fresh & Easy, we believe everyone deserves access to fresh, wholesome food at affordable prices. We are proud to fill these voids in neighborhoods and offer competitive new jobs as well as quality food."

Tesco's Fresh & Easy is one of the few businesses expanding at present in the states of California, Nevada and Arizona, which most economists believe have been in economic recession for months already.

The three states are at the top of the lists of U.S. states in terms of having among the highest residential housing foreclosures in the country, for example.

Additionally, California, Nevada and Arizona have been experiencing among the fastest-rising job loss numbers in the U.S. For example, California's unemployment rate hit 7.7% for August. Just a year ago is was well under 6%.

California now has the third-highest unemployment rate in the U.S. Only Michigan (the worst) and Hawaii (number two) have more unemployed residents than California.

Most economists and forecasters in the nation's largest state, which has nearly 40 billion residents, are predicting September's unemployment figure will be over 8% when it's released later this month.

The good news for Tesco is there remain many vacant supermarket retail box buildings throughout California and Arizona, particularly in California. And the purchase and lease rates and deals are much hotter on most of these buildings than they were a year ago.

This is because of a confluence of negative factors impacting the economy and the commercial retail real estate industry. Those factors include: the frozen credit markets; the recessionary economy, especially in California; a glut of buildings and a shortage of interested acquirers; a significant drop in consumer spending which is affecting retailers severely and resulting in most non-food retailers (and even some food retailers like Whole Foods Market and a few others) cutting back the number of new stores they planned to open this year and next; and of course most recently the series financial crisis happening before or eyes in the U.S. and which has now spread throughout Europe and is heading for Asia.

Among the hottest deals in California are in the state's Central Valley which is experiencing some of the highest unemployment numbers in the U.S., along with having three counties --Merced, Stanislaus and San Joaquin -- in the position of being among the top five home foreclosure counties (often coming in first, second and third place respectively in numerous months) in the U.S. since the beginning of 2008 (to the present).

The unemployment rates in a number of Central Valley counties such as Merced (over 13%), Stanislaus (12%), Fresno (11%) and San Joaquin (11%) are much higher than the state's average of 7.7%.

The Central Valley -- from Bakersfield and Fresno counties in the southern valley to Stanislaus and San Joaquin in the northern valley, and on north into Sacramento -- are all places Tesco will open Fresh & Easy stores starting in 2009 as it expands north in California from Southern California. The retailer already has numerous store sites in the valley regions and is looking for more.

Since landlords are wheeling and dealing, the leases on vacant retail buildings in these areas are said by numerous commercial retail real estate agents to be the best since the 1970's U.S. recession. As an example, housing values in most of these counties have decreased in less than a two year period of time by 30 -to- 50%, according to U.S. federal government data and local data compiled by real estate firms in the Central Valley counties.

Save Mart is based in Modesto, California and operates supermarkets under the Save Mart banner throughout the valley. It also operates discount warehouse-style stores under the Food Maxx banner in the Central Valley, and supermarkets under the Lucky banner in the San Francisco Bay Area, Sacramento region and other parts of Northern California. The privately held chain has sales of about $6.5 billion annually.

Below are the eight vacant supermarket buildings Retail Associates recently listed. Four of the stores (Fresno, Clovis, Dinuba) are in the Fresno region. One, the Chowchilla unit, is between Fresno and Merced. The seventh store is in Merced, and the remaining two stores are farther northin the valley, the one in Stockton and the other in Citrus heights, which is near Sacramento.

Tesco's Fresh & Easy is a tenant of the Retail Associates firm, as are the supermarket chains Save Mart, Kroger, Food-4-Less, Winco and Fiesta Foods; discounters Costco and Dollar Tree; drug chains Walgreens and Long's Drugs; and numerous other retailers and restaurants, along with banks and other retail businesses.

Other commercial real estates firms in the Central Valley tell us they have available retail buildings throughout the regions as well, including vacant Albertsons, Ralphs and other supermarket buildings.

A commercial retail real estate agent in Modesto told us tenants in that city are renegotiating their leases and often getting significant discounts. New retail store openings are nearly at a halt in the city, which was one the fastest growing in California from the mid 1990's -to- about 2004. Tesco has one confirmed Fresh & Easy store set to open next year in Modesto and is looking for addition locations in and around the city of about 205,000.

Locations are available in Stockton and Sacramento farther north as well as into the heavily populated San Francisco Bay Area. Tesco will open stores in all these regions starting in 2009, and continues to look for new locations in all the areas mentioned.

Meanwhile, will 93 Fresh & Easy stores already opened and plans to open at least 100 -to 150 more stores between now and the end of 2009, Tesco is grabbing up the most favorable leases it can in this poor economy. A few years from now that's going to be a very strong competitive advantage for the grocery chain.

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